Understand the property cycle
Understand the Statistics
While experts talk about global financial crisis, we always start to worry about the property price movement. It is easy to get confused and frustrated by contradictory statistics if you take a SHORT-term view of property price movements. However, if you understand that property prices cycles, the picture becomes much clearer. Let’s have a look the facts about property market.
For instance, England, as a kingdom which has collected a very accurate statistics on every birth, death, marriage, and sale of land since 1088 A.D for 920 years, researches on property prices are very much easier to be analysed compare to any other nations around the world.
The result shows, for the past 920 years, property prices have risen at a compound rate of increase of 10.2% per annum, which states that any number which increases at 10% p.a. compound, doubles every 7.2 years. So, for over 900 years, property prices in England have been doubling, on average, every 7 years.
In Australia, over the past 120 years’ statistics result shows, property prices have risen at an average compound rate of 10.4%, which again have doubled every 7 years despite droughts, wars, changes of government, interstate and overseas migration, interest rate movements, exchange rate movements, changing rates of unemployment, CPI movements, etc.
Understand the Basic Demand & Supply
The ever-increasing need for housing in major cities like Melbourne and Sydney are not based on temporary boom factors but on underlying (substantial and permanent) shifts in population. Each city has a strong underlying economy, which is not dependent on one particular industry. In addition, estimates of Melbourne's population for 2020 is over four million people (an approximate increase of 25% in 13 years). This huge population increase triggers the need to accommodate these extra people.
On the supplying side, the reality is that Melbourne's building industry cannot build more than about 140,000 accommodation units (houses and apartments) per annum due to shortages of qualified tradespeople of all types and shortage of suitably zoned land and the building permit process. Demand, on the other hand, is estimated at approximately 170,000 accommodation units per annum. Added to this, State and Federal governments have all but completely removed themselves from supply of affordable housing.
The inevitable consequence is that house and apartment prices will continue to rise (quickly over the next 2-3 years and then more moderately). And rentals, which are already moving up quickly, will continue to rise ahead of CPI.
Understand Rent VS Vacancy Rate
The rent, which determined by supply & demand, and the value of the properties determine the rental return per annum. Rental returns on residential property tend to vary between about 3.5-4.0% and 5.5-6.0%, although this rate rises and falls at different times in the cycle as real rents and property prices move up at different rates.
Due to the vacancy rates continue to decline from 4% to a little over 0.9% in most parts of Melbourne, the rental returns have moved very close to the top end of this range and are showing every sign of continuing to rise. The city's long-term imbalance between the new accommodation that can be supplied and the level demanded by increased population/increased member of new household formations noted above, allows the actual level of rents to continue to rise quite quickly. This will attract new investors into the residential house and apartment markets, which will, in turn, keep pushing prices up.
Understand the Interest Rates
Despite the 16-17% interest rates experienced only once in Australia's history, interest rates are now approximately 1-1.5% above the lowest they have been in the last 40 years, base on adding the present CPI increase and the additional incentive needed to be offered for people to save and lend their money to others.
Even though, the currently rates are above the theoretically justified level. It is still possible for the Reserve Bank to use one or even two more 0.25 per cent interest rate rises to send a message to the market not to get 'overheated'. Even two such increases will leave interest rates within 2% of their 40-year lows. A 0.25% per cent increase in the average mortgage of around $330,000 is equivalent to an extra $15.90 per week ($68.70 per month) in repayments.
By comparison, a 10% increase in the median house price of $330,000 in Melbourne is equivalent to an $634 per week ($2750 per month) increase in the owner's wealth.
All these factors point strongly to residential property continuing to be the premier investment vehicle for most people.
